If spending increases by $100, and GDP increases by $400 as a result, what must the MPC be?
A) 0.70
B) 0.75
C) 4
D) 2

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC). Given that the GDP increases by $400 as a result of a $100 increase in spending, the multiplier is 4 ($400 / $100). Rearranging the formula to solve for MPC gives us MPC = 1 - (1 / Multiplier), which is 1 - (1 / 4) = 0.75.

If Spending Increases by $100, and GDP Increases by $400